Systematic Active Fixed Income Climate Strategies Integrating sustainability considerations within a systematic fixed income framework
Our analysis suggests that climate criteria can be incorporated into the SAFI framework with limited impact on historical key portfolio characteristics and risk-adjusted returns. Learn
more from Nataliya Ivanova, Senior Client Portfolio Manager, Fixed Income.
SAFI Climate allows investors access to the same diversification relative to fundamental actively-managed portfolios as the SAFI strategies, while allowing investors to incorporate specified sustainability criteria into their portfolios.
In this paper, we compare two of the systematic active fixed income (SAFI) strategies we offer: a climate- and sustainability aware-themed investment grade (IG) corporate bond strategy (“SAFI Climate”), and a standard SAFI investment grade corporate bond strategy that does not incorporate any sustainability objectives (“SAFI”).
Key highlights
Performance differential between the SAFI Climate and SAFI standard strategies (typical) 1
Average credit quality of SAFI and SAFI Climate 2
Sustainable investing fixed income AUM 3
Source: State Street Investment Management, as of June 30, 2026
Strategy profile: SAFI Climate
The SAFI Climate Strategy is designed to reduce exposure to issuers with higher carbon emissions and fossil-fuel-related activities relative to a market-weighted corporate bond index by reallocating capital towards companies better positioned to manage the risks associated with climate change. In addition, the strategy applies exclusionary screens based on adherence to certain international norms and product involvement criteria.
The SAFI Climate Strategy aims to achieve several key objectives relative to the benchmark across six categories of climate-related metrics (Figure 1). These sustainability objectives come in addition to the primary objective of seeking outperformance (alpha) over the benchmark. They are embedded into portfolio construction alongside the traditional SAFI security-level factor scores and multiple risk management considerations.
Learn more about the SAFI investment process here.
At its core, SAFI Climate targets key sustainability factors. For example, the SAFI Climate Strategy aims to minimize exposure to companies with high fossil-fuel related risks or those involved in severe environmental, social and governance (ESG) controversies. SAFI Climate also aims to overweight companies that have historically reported efforts to align with climate transition goals.
Importantly, the SAFI Climate framework is adaptable and can be tailored to reflect specific preferences of asset owners.
Figure 1: Select metrics and targets for the SAFI Climate Strategy
| Category | Metric | Purpose | Target realative to the benchmark |
|---|---|---|---|
| Backward Looking | GHG Intensity (CO2e emissions per $m Revenues) | Considers a company’s emissions in relation to its output. | ↓ ≥50%* reduction relative to the benchmark, with an annual 7.5% year-over-year reduction in effect in 2030. |
| Fossil Fuel Reserves (Embedded CO2e Emissions (MTCO2) | Connects a company’s operations to the risks of stranded assets and associated potential write offs. | ↓ ≥75% | |
| Brown Revenues (% Revenues from fossil fuel-related activities) | Measures exposure to activities associated with the extraction and direct use of fossil fuel sources, as well as supporting activities. | ↓ ≥75% | |
| Forward Looking | Carbon Risk Rating (Score on climate preparedness) | (A bottom-up measure). Assesses climate risks and opportunities including their carbon footprint, and the management of their industry-specific carbon risks. | Remove bonds scored 24 or lower (climate laggards)† |
| Product & Norms-Based | Sustainability Risks 1. UN Global Compact 2. Controversial weapons 3. Severe controversies 4. Thermal coal 5. Arctic oil and gas 6. Oil sands 7. Civilian firearms 8. Thermal coal 9. Tobacco 10. Sustainable Investment (SFDR) | Norms-based, controversy risk and controversial product involvement screening. Sustainable Investment (SFDR) monitoring. | ↓ 100% for controversy & product involvement where data is available. A minimum of 25% for sustainable investments, according to SFDR criteria |
Labelled Bonds | Green Labelled Bond Bonds that qualify as green according to the Climate Bonds Initiative Taxonomy and database | Increases the share of investments into projects with specific environmental objectives. | ↑ ≥1.5x ‡ |
Source: State Street Investment Management. As of June 30, 2026. *The framework applies “zeros” for carbon intensity, brown revenue and fossil fuel reserves metrics associated for bonds identified as green bonds. † Carbon risk rating is based on the ISS rating methodology. ‡ The aim is to increase the weight of green bonds in the strategy to 1.5x the benchmark weight. However, once the strategy exposure to green bonds is at 35% weight, any additional increase versus the benchmark weight would only be matched by the strategy, and not increased by a factor of 1.5x. The above targets are based on certain assumptions and analysis made by State Street Investment Management. There is no guarantee that the targets will be achieved. The portfolio is monitored against the targets on the rebalance dates and the portfolio may therefore deviate from the targets between the rebalance dates. State Street Investment Management reserves the rights to modify the targets.
Comparative Analysis: The SAFI Climate Strategy versus the Standard SAFI Strategy
To assess the practical implications of integrating climate considerations into systematic active fixed income strategies, we compare the SAFI Climate Strategy with a standard SAFI strategy that does not incorporate any sustainability objectives (“SAFI”), either in the USD or in the EUR market. The comparison is based on realistically simulated model portfolios. For the first step, we contrast the historical performances of the two strategies over several years. Second, we compare their characteristics in terms of broad risk exposures, sustainability metrics and sector allocation at a given point in time.
Performance review
Our analysis shows that the performance differential between the SAFI Climate and SAFI standard strategies for the US and Global strategies was very small—typically within ±5 basis points (annualized over the period from August 2019 to June 2026)2. This minimal deviation underscores that the SAFI Climate framework has historically exhibited similar return characteristics to the standard SAFI approach.
The performance difference for the SAFI EUR IG Climate strategy was slightly higher at +28 bps, and appears less related to the additional sustainability screens themselves than to how the common climate framework interacts with the EUR investment universe and the standard SAFI security selection.
The EUR standard SAFI portfolio had higher exposure than the EUR benchmark to selected product involvement, controversy and carbon-related metrics, so applying the climate framework required more meaningful issuer and sector substitutions. This is visible in the reduction of product involvement and controversy exposure from 1.09% in the EUR standard portfolio to 0.00% in the EUR Climate portfolio, and in the reduction of WACI from 81.12 to 41.89. The resulting performance impact remains modest, and the EUR Climate strategy also shows lower tracking error and a higher information ratio than the standard EUR SAFI strategy.
The ability to maintain portfolio performance while achieving meaningful sustainability alignment—such as reductions in GHG intensity, fossil fuel reserves exposure, and sustainability-related controversy risk—illustrates how climate-related criteria may be incorporated into a fixed income investment approach. Performance attributions for both the SAFI Standard IG and SAFI Climate strategies further validate the robustness of the process, with security selection, driven by scorecard signals, as the dominant contributor to returns—rather than market beta or systematic risks.3
If you would like further details on the EUR, Global or US model and comparison characteristics, please contact the FICC team at State Street Investment Management.